Personal loans are given by most banks, financial institutions, non-banking financial corporation and private lending institutions. Also called instant loans, personal loans have various categories. The two main categories are secured and unsecured loans. The former require collateral from the borrower. The latter do not need any security. Secured loans have a higher amount and a lower rate of interest. Unsecured loans have a lower amount and a higher rate of interest.
When is the best time to take a personal instant loan?
Personal loan should not be taken in an indiscrete manner. It is only a resource that fulfils an immediate need. While taking from friends and relatives is another option, often this can lead to discord. Most often, money dealings with friends and dealings can be a reason for the breakage of the relationship. Instead, a smarter option is to take a personal loan and pay it back in equated monthly instalments.
A personal loan should be taken only if the person has adequate income to repay the money back. If not, then the person is added to the defaulter’s list. Not only does this person’s CIBIL credit rating come down, but banks may blacklist the person and prevent this person from taking any further loans or financial products from the same bank.
An instant personal loan can be taken by business persons to supplement their need for working capital emergencies. It is a common practice to take a personal loan to provide interim working capital, and pay back the personal loan once the invoice is materialized and the cash flow happens.
What are some of the other reasons to take a personal loan?
Some of the other reasons to take a personal loan are:
- Education An instant education loan is a perfect way to get funds to travel to an overseas location for education, pay for tuition fees, and accommodation expenses. Most education loan providers allow flexibility of at least 2 years after graduation for students to find a job and start repaying the loan.
- Personal Needs The days of accumulating money before buying appliances or essential home items is gone. Now everyone purchases the latest TVs, computers, electronic gadgets etc. on personal loans and repays them on EMIs. Personal loans provide the freedom and flexibility for consumers to purchase any item under the sun. Therefore, personal loans allow true consumerism and are amongst the chief reasons for the proliferation of the economy and also the backbone of the consumer business in India and overseas.
- Home Renovation Yet again, a home re-dιcor and refurbishment is only a personal loan away. This means it is only a few days away. So effectively, a home renovation activity can be started immediately unlike several decades ago that where home-renovations happened rarely.
Factors to consider when applying for a personal loan
While a personal loan can empower a person to purchase any item under the sun or avail any service, there are certain considerations to make.
- EMI Short for equated monthly instalments, an EMI consists of two components principal component and an interest component. EMIs are spread across the tenure of repayment of the personal loan. Initially, in an EMI, the principal component could be lesser than the interest component. This is because some banks try to take all the interest on the personal loan in the first couple of years itself, leaving out the last EMIs of the personal loan solely focused on repaying the principal amount. There are also EMIs based on reducing the rate of interest. In this type of scheme, whenever the principal of a loan reduces, interest for the next EMI is computed only the outstanding principal loan amount.
- The Rate of Interest Personal loans can have interest rates as low as 8% to as high as 18%. RBI mandates that loan interest rates are in the range of 8% to 12%. However, there are several banks that give personal loans to customers with bad or average credit ratings for a higher interest rate. Also, the fact that unsecured personal loans are preferred by most people makes banks levy higher interest rates to cover the risk. Therefore, it is ideal to choose a personal loan from a reputed bank or financial institution that levies a moderate interest.
- Tenure of the Loan An instant personal loan tenure is generally of 5 years. If a borrower wants to foreclose the loan before the tenure completes, they can do so by paying up the outstanding amount. A foreclosure charge may or may not be levied depending on the policies of the lending institution.
- Processing Fee This is the amount charged by the loan provider for processing the loan. There could be additional charges depending on the policies of the loan provider. Ensure to read the terms and conditions carefully.
Why taking a personal loan is a better idea than using a credit card
Credit cards are an excellent choice for short term credit spanning within 45 days. A personal loan is a good way to get higher funds that can be repaid over a longer period of time. Credit cards may not have high cash withdrawal limits or credit card loan amounts. Whereas, a personal loan can be taken for as low as Rs. 1,00,000 to Rs. 50,00,000.
Another drawback of using a credit card is that if not paid on time, the charges are higher. Not only is the late payment charge very high, there is also a risk of the credit rating of the person plummeting. It is not uncommon to hear how people’s credit ratings went drastically down by not following credit card discipline.
What are the documents required for a personal loan?
KYC documents, payslip and bank statements.
How to apply for a personal loan?
Apply online. Get approval. Money is deposited. Use the money.
Is taking a personal loan limited to salaried professionals?
Personal loans can be taken by self-employed people if they can produce receipts that show that their business is generating revenue or profits.
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